21 February 2001 External T.I. 2000-0050145 - RRSPS OF STATUS INDIANS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Calculation of taxable exempt portions of withdrawals from an RRSP held by a status Indian.

Position TAKEN:

In a situation where a status Indian contributes to an RRSP based on tax-exempt income, such that the contributions are not deductible, in our view, withdrawals of the principal would be tax-exempt. However, the withdrawal of any investment earnings should be taxed similarly to ordinary investment income.

However, in situations where the status Indian technically has RRSP contribution room, eligible retiring allowance(s), or transfers from an RPP, and payments from an RRSP principal or income) relate to income that was exempt from tax (or accorded treatment by a remission order), the payments will usually be exempt from tax.

Reasons:

See earlier positions.

XXXXXXXXXX 2000-005014
T. Young, CA
February 21, 2001

Dear XXXXXXXXXX:

Re: Registered Retirement Savings Plan (RRSP) Held by Status Indian

This is in reply to your letter of August 1, 2000, which you sent to us on November 14, 2000, requesting our opinion on various issues relating to the taxation of income earned by a status Indian. We also acknowledge our telephone conversation (Young/XXXXXXXXXX) of January 18, 2001.

Pursuant to our conversation, the only outstanding issue to which you require a written response is guidance on the calculation of the taxable and exempt portions of RRSPs held by a status Indian.

Our Comments

The particular circumstances on which you have asked for our views are a factual situation involving your personal taxes. As explained in Information Circular 70-6R4, dated January 29, 2001, it is not this Directorate's practice to comment on completed transactions involving specific taxpayers. Confirmation of the tax consequences associated with completed transactions is provided by the relevant Tax Services Office. As well, as stated below, in order to calculate the taxable and exempt portion of withdrawals from your RRSP, we would require details of the timing and amounts of your contributions and whether or not any of your income was subject to remission orders with respect to income earned on reserve. Therefore, we can only provide you with the following general comments.

A taxpayer's RRSP deduction limit is based on the taxpayer's "earned income", within the meaning assigned by subsection 146(1) of the Income Tax Act (the "Act"). Income that is exempt from taxation pursuant to paragraph 81(1)(a) of the Act and section 87 of the Indian Act does not generate "earned income" for purposes of the Act. Consequently, where a contribution to an RRSP relates solely to an Indian's tax-exempt income (i.e., the Indian has no "earned income"), the contribution cannot be deducted.

In a situation where a status Indian contributes to an RRSP based on tax-exempt income, such that the contributions are not deductible, in our view, withdrawals of the principal would be tax-exempt. However, the withdrawal of any investment earnings should be taxed similarly to ordinary investment income.

Based on the case of Arnold Recalma v. The Queen, 96 DTC 1520, 98 DTC 6238, it is necessary to determine the location of the issuer's income generating activity of the investment instrument. In our view, the income stream from investments held within an RRSP, whether the issuer is located on or off reserve, will generally not be connected to a reserve. As such income will generally be generated off the reserve, it would be considered to be earned in the normal economic mainstream and, accordingly, not considered personal property situated on a reserve. In our view, unless the investment income can be identified as exclusively generated on the reserve, the income is not exempt from tax.

Furthermore, there is a 1% penalty tax which is payable by taxpayers on "excess amounts" held by their RRSPs at the end of each month. For a status Indian, excess amounts will be calculated on cumulative contributions to an RRSP out of exempt income, which have not been withdrawn from the RRSP before the end of a particular month. If steps are taken to remove any excess amounts from the RRSP, the law provides that the Minister of Revenue may waive the penalty tax. Your local Tax Services Office should be contacted by you directly in this regard.

However, formerly when a remission order applied to remit a status Indian's taxes otherwise payable on employment income, he or she would technically have had "earned income" and would have been entitled to contribute to an RRS? In other instances, the amounts in an RRSP relate to amounts transferred from a Registered Pension Plan (RPP) or contributed from an eligible retiring allowance, which in turn related to tax-exempt employment income. In such situations, the Canada Customs and Revenue Agency's position is that payments (principal and investment income) from these RRSPs will usually be exempt from tax. If only a portion of the payments relate to income that was exempt, then the exemption will be prorated. This position is the same as the position for RPP benefits and retiring allowances reflected in the Indian Act Exemption for Employment Income Guidelines issued in June 1994.

We trust our comments will be of assistance to you. If you require further information,

please contact your local Tax Services Office.

Yours truly,

M. Azzi CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

c.c. Louise Dugas (Sudbury Tax Services Office)

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